Going Nuts Over Contract Management Systems

Perhaps other people—ne’er-do-wells and losers, obviously—think that contract management is boring. Well, that’s not the case here at Radical Compliance, so we were delighted earlier today to see a quick essay on subject posted on LinkedIn. Let’s get into it.

The post was written by Martin Lønstrup, senior legal adviser at Maersk Oil in Houston. He walks through 10 items to keep in mind while looking for a contract management solution, from securing executive support (true of any software implementation), to knowing your contract processes (too many companies still struggle with this), to ensuring that whatever system you use can create the right reports and interface with the rest of your IT system. It’s a quick read that hits on all relevant points, and compliance officers can take comfort in knowing that one of their own is the author.

Contract management has been on my mind lately because a few big trends are coming to bear in corporate compliance where astute management of your contracts—especially if you can automate that work—will save compliance officers plenty of time. Let’s consider a few of them:

  • Revenue recognition. The Financial Accounting Standards Board’s new standard for revenue recognition is well underway now (effective date in 2018). That standard will redefine revenue as a series of performance obligations to be fulfilled before a company can recognize revenue on its books—even if the revenue is already in your bank account. That means your company will need to do a close reading of its contracts (the ones you already have, plus any you sign in the future) to understand when and how your obligations will be fulfilled. Do you really want the folks in accounting or sales to do that contract review work themselves? Do you want to do all those reviews manually? If not, then a contract management system is a mighty useful tool to have.
  • Anti-corruption. The devil of anti-corruption enforcement is in your third parties, plain and simple. (In fact, I challenge anyone to give me a recent example of Foreign Corrupt Practices Act enforcement that did not involve a third party acting on the defendant’s behalf.) At the modern global corporation it’s impossible for the compliance officer to review, or probably even know about, every contract your business signs with third parties. The ideal solution is one part policies & procedures clearly communicated to business units, yes; but also one part contract management system, so the compliance officer can quickly find contracts that require his or her attention. Indeed, the best solution would give you “contract lifecycle management,” so you can track (or be alerted to) high-risk contracts as they move from inception, to negotiation, to fulfillment, to closure.
  • Data privacy. A huge part of business today now deals with data: how you collect it, manipulate it, store it, and move it. Most companies now use third parties to do those tasks on your behalf. The details of those contracts can have severe compliance repercussions, especially if you traffic in data on European citizens. Your contracts need strong, clear language about where data is stored and who else (sub-contractors to your third parties, mostly) has access to that data. Good luck enforcing all this, since employees can still ignore your rules and rent data storage themselves now with a credit card, but without strong contract management, you’re hopelessly lost.

To my thinking, the most important points in Lønstrup’s post are his first and third points, respectively: Is your organization ready to implement a contract management system? And do you understand your contracting process and governance?

The other questions Lønstrup raises in his post—can the system handle legacy documents, can it build dashboards, can it provide automated alerts, and so forth—can all be answered by any good software sales rep who makes it into your office. Those are questions about finding the right product for your organization, and the vendor’s job is to answer them.

His questions about your organization’s readiness and its process for governing contracts in the first place—those are questions about your company, regardless of the vendors you’re considering. Only you, the chief compliance officer, can answer them.

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